Section 2 – Common Assumptions And Mistakes

Table of Contents

Common myths

  • Investing is complicated and suitable for highly literate people- People often think investing is very complicated process and not a domain of a common man.  This is one of the biggest causes of hesitation in investing money in financial products like Stock, bonds and mutual fund units. The truth is investing is not necessarily a complicated activity. It does not require any set of specific knowledge or professional skills of higher level. General awareness, understanding of financial products and selection of right investment matching with the investment objectives of the investor are sufficient to begin with the investment for a new investor.

People can take expert advice of the finance professionals also before making an investment.

  • Investing can be done by rich people only- This myth is very common that investing is an activity of rich people only who have plenty of money.  It is far away from fact. Investment can be started with Rs 500 only like a SIP in a mutual fund scheme. The most important thing required is being consistent with your small investment also. 
  • Investing can be done only in stock market – For a big populace in India investing means buying shares from stock market only.  There are many investment options available. Stock investment is just one out of them. Investor can choose the best suitable option as per their investment objective.
  • My savings in bank is sufficient for my future – People feel that the money kept in bank will be sufficient to cater their future needs which may not be true in most of the cases.

They see their future expenses as per today’s expenses and also do calculations on today’s basis. The reality is that future expenses will always be higher than today because the purchasing power of money goes on decreasing.

Suppose your cost of marriage is 10 lakhs today. You kept Rs 10 lakh in bank for the purpose of your daughter’s marriage which is expected to happen after 5 years from now. After 5 years cost of marriage become 12 lakhs due to inflation. Now that 10 lakhs will not be sufficient to meet the marriage expenses. So, the assumption of keeping sufficient fund in bank locker or savings account may put you in distress.

  • My Pension and provident fund can easily take care of my Retired life expenses– Pension and Provident Fund is a provision to provide financial assistance to a retired person. People generally think that with this amount, they can lead their retired life efficiently.

This may not be true in every circumstance. Amount of pension is very small as compared to the salary they were getting earlier. The person may have to still fulfill some family responsibility like marriage of children etc.

If they want to continue the same lifestyle even after retirement, they will need more money than the pension amount.

Common mistakes we do with our Money

There are some common mistakes which most of us do with our money. These common money mistakes are –

Instead of cutting short your expenses try to grow your income

We try to curtail our expenses to increase the amount of saving. This method of saving is not very perfect. It is because you can curtail your expenses up to a certain level only. You cannot cut short your genuine expenses like food, rent, fees etc. In general, a person can save 20% to 30% of his income. So, this is limited to a certain extent but you can grow your income unlimited. You can increase your income by many ways depending upon your proficiency and willingness.

We do not utilize our time in making wealth

Most of us talk about price of the Mango we purchased today. The person who brought that Mango at a cheaper price is supposed to be smarter than others. Suppose he saved 200 rupees in this purchasing. Now calculate how much time he spent in this shopping. He went to the wholesale market which is 10 Km far from his house. He spent three hours and the petrol for this shopping.

This will not add value in your life because your time is very much precious.  You should try to make money by using that 3 hours’ time. Think to convert your time into money in the best possible manner. Focus yourself in earning high instead of saving pennies.

We don’t take risk even if we can

Many a times we do not analyse our risk bearing capacity in tune of our financial health. We feel fear even in taking calculated risk in investment. It may be due to certain socio psychological causes. It is important to do an adequate risk profiling and make informed investment decisions. The process of identifying investor’s risks appetite is called Risk Profiling. This will give a fair reflection about the amount of risk to be taken by the investor.

We work hard for money and our money should work hard for us – Let’s give this opportunity to it.

Common mistakes we do with our investments

  • Unplanned investment: Many of us make unplanned investment without considering or fixing future financial goals. A smart investor always has a plan based on future financial goals and make investments on facts and figures collected through reliable sources. First time investors often start investing without any sound investment planning. This may result in unexpected losses.
  • Investment under Biased frame of mind: Emotion driven decisions may lead our investment to the wrong track. Investor often takes his decision not by careful analysis of relevant information, but based on his behavioral bias like confidence bias, herd mentality etc. The investment decision making must be done by analyzing expected performance of the investment and the risk associated with the investment.
  • Inadequate selection of investment avenues: There are many investment products available in financial market. Section of right investment avenue is very important for every investor. Sometime people invest in a financial product which may not be suitable for them. For example, a small investor taking the route of investment in shares directly instead of opting for a good Equity Mutual Fund scheme.
  • Lack of diversification: Diversification of investment must be maintained by every investor. It helps you balance your investment portfolio and minimize the risk of loss. New investors generally invest all their money in one financial product which is not supposed to be a good practice.
  • Lack of patience: Volatility is a feature of financial market. Market moves up and down in its own tune. Many new investors get impatient with their investments due to this volatility and take decisions which may lead towards losses. Whereas the seasoned investors keep a sharp eye on their investment with patience and take balanced decisions. Investment and redemption decisions must be taken by every investor with patience and free from bias.
  • Fraudulent trap: Some time we invest in faulty and fraudulent schemes which promise unrealistic lucrative returns and at the end lose our principal also. For example, many people invested in Golden Forest, JVG, Speak Asia and Stock Guru who promised easy money for doing virtually nothing. The fantastic returns promised by the fraudsters should have been a red flag for investors.
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